Manappuram Finance Ltd.
AUM of 11,000 cr.
3300 branches across India: 23 states and 4 union
territories.
20 lakh customer base.
History:
MF is India’s first and one of the
leading gold loans NBFCs focusing on customers who do not have access to formal
banking system, with strong presence in semi urban (32% of total branches) and
rural (22% of total branches) markets.
Founded by late V.C. Padmanabhan,
father of Nanadakumar, in 1949 in Kerela. It was started with the activities
like pawn broking and money lending on a modest scale. Nandakumar took over in
1986 after his father’s death. He chose
the corporate route to expand the company in 1992.
It is said that one of the
parameter to analyze management is to go back in the history and check how they
overcame all the challenges they faced.
Challenges:
Towards end of 1996, NBFC sector
in India came under regulatory pressure. Raising funds became difficult and
company started facing serious asset-liability mismatch. It laid the foundation
of the gold loan business. It was an untested model which made banks unwilling
to lend, resulting in insignificant growth for MF. MF got its first success
with ICICI bank in 2005 and was the first gold loan company to raise finance
through bank. Soon, banks faced some regulatory problems and they turned off MF.
This was not the end of the story as under the leadership of Nandakumar, the
company joined hands with Temasek – Singapore sovereign investment fund.
Regulatory Changes by RBI in March 2012: Removal of Priority Sector
Lending Status which led to Higher Borrowing Cost.
March
2012: Cap on LTV to not exceed more than 60% which weakened the Competitive
positioning vis-à-vis Banks and Moneylenders as higher LTV Focused customers
moved to Moneylenders whereas Interest Rate sensitive customers moved to Banks.
What is LTV: LTV, or loan-to-value, is all about how much mortgage
you have in relation to how much your property is worth. It's normally a
percentage figure that reflects the percentage of your property that is mortgaged,
and the amount that is yours (the amount you own is usually called your equity).
In 2013: there was a period of sharp
correction in gold prices which had an adverse impact on the gold loan
repayment. In the line with industry practice, the company had sanctioned all
the loans for a period of one year, term repayments of both – interest and
principal was due. This meant the in case of a default, it was to be recognized
only after one year from the date of sanction and it would take another 3 months
to auction the underlying gold. Effectively, company had a price risk for 15
months. Nanda kumar decided to change the business model by launching short term
gold loans for 3-6 months tenure. Today entire gold loan portfolio has been
shifted to short term buckets. This strategic change was successful in
protecting the gold loan business from a sharp correction in gold price. Risk
of default is minimal. Company is in a better position to recognize default at
an early stage. The market value of collateral usually exceeds the outstanding
loan amount and borrowers now have a great incentive to settle their loan than
to choose to default. Thus auctions have come down drastically and yields have
improved.
Demand:
- India remained the second biggest consumer of gold in 2015 after China. India’s demand for gold is likely to rise this year as investors have factored in the interest rate hike by US Federal Reserve.
- Financial inclusion is likely to help NBFCs.
- With the RBI now prescribing a uniform cap on LTV of 75 % for both banks and NBFCs, there is a level playing field which benefits NBFCs
- Above normal monsoon predictions will lead to higher growth from small centres as well as rural areas.
- The Government’s vision of housing for all citizens by 2022 will require the development of about 11 crores houses with investments of over US$ 2 trillion.
Threats:
- Substantial fall in gold price.
- Increase in import duty of gold.
- Branch concentrated in southern India.
Recent
developments:
- Rating company Crisil has upgraded MF's credit rating to 'AA-/Stable' from 'A+/Stable'. The revised rating is applicable to the long-term bank facility and non-convertible debentures of the company.
- July 2016: Nandakumar said: “Auctions have reduced to less than 1% by reducing loan tenures to 3-6 months. Projecting a 20-25% CAGR growth over the next 5 years. Gold price declines of 5-6% will not have much impact on business.”
- June 2016: Shriram Automall India Limited (SAMIL), India’s No.1 platform for exchange of pre-owned vehicles and equipment, has joined hands with MF. With this tie-up, the company marks a successful commencement of its association with the financial institution and extends the benefits of its holistic solutions for the disposal of all types of pre-owned vehicles and equipment. Under this alliance, Shriram Automall will cater to all the segments of the MF, including pre-owned commercial vehicles, construction equipment, tractors, cars & SUVs, three wheelers and two wheelers.
- May 2016: “The consolidated growth, we are pretty sure, will be about 20 per cent CAGR in another two-three years. The growth segment will be in gold loan, which will be growing around 15-20 per cent. In case of microfinance, we expect the growth to be around 75-100 per cent on an average in another two years. Then, in case of home finance, which was around ₹140 crore, will grow to around ₹400-500 crore. Similarly, passenger vehicles loans will also be around ₹400 crore. Overall, we expect 20 per cent growth in the consolidated loan book, as well as for both the top line and the bottom line.”
- Company launched online gold loan (OGl) in Oct 2015. Management is pleased by the progress made in this front. Customers who have availed the gold depository services will automatically become eligible for gold loan, up to the LTV limits. Customers can apply for the Loan from anywhere online. Loan within permissible limits of LTV can be disbursed to a customer’s bank account or eWallet card online, almost instantly, 24/7. Substantial reduction in Transactional and Operational cost.
- In February 2015, MC took over Asirvad microfinance. The company back then had AUM of about 300 cr. In one year, it was grown to 1000 cr. MC is expecting good growth and has a target of increasing this AUM to 2000cr.
- On Gold monetization scheme: Nandakumar said: “We do not foresee any impact on our business and customers. This monetization scheme targets those who has surplus gold which is kept locked up in safes and vaults. In contrast, the gold loan business targets that segment who have limited savings in gold and who occasionally need to draw money against it”
- Last, but not the least- MC has laid more emphasis on trading activities at branch level. All branch staff are encouraged to approach the market directly with a focus on winning back lost customers. Branch sales activities accompanied by an incentive structure (remember Charlie Munger?), promoting new business and also rewarding recoveries in overdue accounts.
- Shifting to 90 days NPA recognition, well in advance of RBI norms which require 120 days for the current fiscal year.
Some excerpts from
the latest AR:
- Manappuram has been a leading wealth creator for investors. Over the course of 20 years, the company has delivered annualized return of 24.6% to investors of its 1995 IPO as compared to 11% delivered by the Sensex. In other words, shareholder wealth since listing in 1995 has gone up 92 times (not counting the uninterrupted dividends). Further, CAGR growth in AUM over the 20 years works out to a staggering 68% while PAT grew at a CAGR of 49%.
- In percentage terms, new businesses now contribute ~12 percent of our total AUM. Importantly, based on these trends, we are well on track to having new businesses contribute 25 percent of total AUM by FY2018.
- During FY2016, MAHOFIN achieved a loan book grew to Rs. 1,286 million. The home finance business grew 5718.2% year-on-year.
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